Short Run Gravity
CESifo, Munich, 2017
CESifo Working Paper No. 6502
![](https://cesifo.org/DocImg/cesifo1_wp6502.jpg?c=1689237070)
Short run gravity is a geometric weighted average of long run gravity and bilateral capacity. The model features (i) joint trade costs endogenous to bilateral volumes, (ii) long run gravity as a limiting case of effcient investment in bilateral capacities, (iii) a structural ratio of short run to long run trade elasticities equal to a microfounded buyers’ incidence elasticity, and (iv) tractable short and long run models of the extensive margin. Application to manufacturing trade of 52 countries during the globalization period 1988-2006 strongly supports the model. Results solve several time invariance and trade elasticity puzzles in the literature.
Trade Policy
Empirical and Theoretical Methods